With the latest Federal Reserve action having disappointed nobody, corporate finance executives are once again encountering hospitable receptions for their firms in both the debt and equity arms of the capital market.
Not only did the Federal Open Market Committee lower its fed funds target by the 50 basis points that has become the norm so far this year, bringing that number to its lowest point in seven years, it signaled through an accompanying statement the probability that there will be more where that came from.
“The risks [to the economy] are weighted mainly toward conditions that may generate economic weakness in the foreseeable future,” the key sentence read. Click here for the complete statement.
But, despite the virtual certainty about the direction of rates, there remains doubt that the Fed rate cuts will continue at the pace they have throughout 2001. Many analysts are now placing their bets on a 25 basis-point cut that should occur when the FOMC next meets in June.
In addition, despite the favorable interest-rate environment, corporate issuance continues to back off from the record volume it has exhibited throughout much of the year. Last week saw about $13.6 billion of new issuance, less than half the $28.5 billion seen the week before.
While some of this slowdown is no doubt attributable to the uncertainty preceding the Tuesday afternoon FOMC announcement, issuance following that event was also relatively anemic by recent standards.
Perhaps the greater impact upon the volume of corporate bond issuance is the increasing availability of palatable alternatives, both from an issuer and investor standpoint.
Equity valuations are up and volatility down. Initial Public Offerings seem possible for the first time in months, and convertible issuance, at about $15 billion, has already broken the monthly record of $11.9 billion established in February. ( see “Today In Finance).
Markets Score Broad Advances
In any case, the markets start the week in arguably the best shape they’ve been in this year. Now only did the Dow Jones Industrial Average close over 11,000 and absolute bond yields on the corporate market maintain their recent low levels, both greatly outperformed Treasurys.
According to figures supplied to CFO.com by Merrill Lynch, the typical spread to Treasurys for an investment-grade bond, on an option-adjusted basis, was tighter in the past week by about five basis points.
While this may not sound like much of a difference, this spread is now lower than it has been at any time this year or the year before, and the same holds true for most corporate bonds throughout the credit spectrum. Let’s look at the numbers:
In the high-yield market, the picture is more mixed, with the higher-rated bonds conforming to the investment-grade pattern of lower spreads and yields, while the poorer-quality debt exhibits the effects of continued market uncertainty.
What Waits In The Wings
In investment grade, there is an aggregate of less than $5 billion of issues known to be planned near-term:
In junk, the pipeline is even more dry, with less than $1 billion of new bonds said to be in the works.